Playing after hours stock movement with expiring options.

[FSU]

Does anyone else here buy cheap expiring options on the close to trade the stock after hours?

I was watching SMCI on Friday. It had over a 270 point range, and on the close the expiring 800 puts were offered at .30 with the stock at 803. This seemed really cheap to control the stock for another 90 minutes.

If you bought these, you would only need a small drop to make money. Even buying a small amount of stock if it dropped would let you then play the upside as well.

If you did this, you most likely would need a Portfolio Margin account as this stock is expensive. You would also need to be absolutely sure of your Brokers exercise cutoff time and also be sure you would be able to reach them to enter an exercise notice.

 

[zdreg]

It is excellent post. However you need to review all assumptions. 1st step to ask your brokers. 2nd step is to confir the answer received

 

[FSU]

However you need to review all assumptions. 1st step to ask your brokers. 2nd step is to confir the answer received

Absolutely. This is the biggest risk of this trade is not being able to get your exercise notice in.

 

[Slow Learning Elf]

<< bunch of good and thoughtful stuff >>

You can take a directional trading approach or some sort of MM-like approach were you just buy cheap after-hours vol and hedge delta intelligently. Personally, I'd lean towards the latter. It would make sense that most of your risk is operational, e.g. not getting the X notice in on time (BoA/M lost 20m in one day on that exact issue back in 2014), having margin issues or delta execution fails.

 

[zdreg]

You can take a directional trading approach or some sort of MM-like approach were you just buy cheap after-hours vol and hedge delta intelligently. Personally, I'd lean towards the latter. It would make sense that most of your risk is operational, e.g. not getting the X notice in on time (BoA/M lost 20m in one day on that exact issue back in 2014), having margin issues or delta execution fails.

Your response is serious but with no practical application on the retail side.

 

[vanzandt]

Does anyone else here buy cheap expiring options on the close to trade the stock after hours?

I was watching SMCI on Friday. It had over a 270 point range, and on the close the expiring 800 puts were offered at .30 with the stock at 803. This seemed really cheap to control the stock for another 90 minutes.

If you bought these, you would only need a small drop to make money. Even buying a small amount of stock if it dropped would let you then play the upside as well.

If you did this, you most likely would need a Portfolio Margin account as this stock is expensive. You would also need to be absolutely sure of your Brokers exercise cutoff time and also be sure you would be able to reach them to enter an exercise notice.

FSU ... yeah its a great idea lol... but I'm pretty sure the price used for settlement on Saturday morning is based on the actual closing price of the stock at 4PM ET on Friday.

So in the after hours if SMCI dropped to $600 because of more bad news, your $0.30 put is still worthless because the contract settlement, even though it's the next day, uses the $803 closing price.

 

[FSU]

FSU ... yeah its a great idea lol... but I'm pretty sure the price used for settlement on Saturday morning is based on the actual closing price of the stock at 4PM ET on Friday.

So in the after hours if SMCI dropped to $600 because of more bad news, your $0.30 put is still worthless because the contract settlement, even though it's the next day, uses the $803 closing price.

I used to do these plays quite a bit, but haven't in awhile. I liked the SMCI play Friday, because I thought the premium on these puts was very cheap. I didn't trade it as I had plans after the close and you need to really be on top of the trade.
Here is what I would have done.

Buy 10 800 puts at .30 just before the close. Stock was around 803. I would have then put bids in the stock after hours. 200 shares at 800 and then bids down much lower. I put the bid in at 800 to have some upside if the stock drops and then turns around. It got to about 799.52 so I would have been filled on the 200 shares, but nothing more. I then would have placed offers higher to scalp the 200 shares. What ever stock I bought and didn't sell out over 800, I would exercise that many puts . I probably would have offered the 200 shares at 803. The stock got up to 805 just before the exercise cutoff time of 530pm et. then rallied to over 830. So I would have made $600 on my stock and lost $300 on my options.

My broker has a cutoff time to notify them of a contrary exercise of 515pm et with best efforts until 530pm et, so I typically like to be out of everything or have my exercise in by 510.

The play allows you to scalp stock for almost 90 minutes with very little risk.

 

[vanzandt]

I used to do these plays quite a bit, but haven't in awhile. I liked the SMCI play Friday, because I thought the premium on these puts was very cheap. I didn't trade it as I had plans after the close and you need to really be on top of the trade.
Here is what I would have done.

Buy 10 800 puts at .30 just before the close. Stock was around 803. I would have then put bids in the stock after hours. 200 shares at 800 and then bids down much lower. I put the bid in at 800 to have some upside if the stock drops and then turns around. It got to about 799.52 so I would have been filled on the 200 shares, but nothing more. I then would have placed offers higher to scalp the 200 shares. What ever stock I bought and didn't sell out over 800, I would exercise that many puts . I probably would have offered the 200 shares at 803. The stock got up to 805 just before the exercise cutoff time of 530pm et. then rallied to over 830. So I would have made $600 on my stock and lost $300 on my options.

My broker has a cutoff time to notify them of a contrary exercise of 515pm et with best efforts until 530pm et, so I typically like to be out of everything or have my exercise in by 510.

The play allows you to scalp stock for almost 90 minutes with very little risk.

Did you read what I wrote? The options that expired at 4pm on Friday use the closing price at 4PM for the settlement of the contract. It could drop to zero at 4:01PM... and it wouldn't matter.

Here:
3. Which prices are used for p.m. options expiration?
For p.m. options expiration, the closing price of the underlying asset is used to determine whether an option is in-the-money or out-of-the-money. The closing price is the last price at which the asset is traded on the exchange on the expiration day.

That is not the after hours exchange.

 

[vanzandt]

Now that last trade can be an anomaly, so the rules are caveated with this:

Determining Settlement Prices on Specific Markets
Typically, the settlement price is set by determining the weighted average price over a certain period of trading, typically shortly before the close of the market.

But either way, what happens after 4PM... has zero effect on determining the settlement price.

 

[FSU]

Did you read what I wrote? The options that expired at 4pm on Friday use the closing price at 4PM for the settlement of the contract. It could drop to zero at 4:01PM... and it wouldn't matter.

Here:
3. Which prices are used for p.m. options expiration?
For p.m. options expiration, the closing price of the underlying asset is used to determine whether an option is in-the-money or out-of-the-money. The closing price is the last price at which the asset is traded on the exchange on the expiration day.

That is not the after hours exchange.

Thats not how it works. Automatic exercise of an option is based on the 4pm closing price. Option holders have until 530pm et (or slightly earlier based on their brokers guidelines) to over ride this automatic exercise or to exercise an out of the money option. This is where the opportunity is. If the stock drops after hours, you can buy the stock and then exercise the option. So in the case of SMCI, if you bought the 800 puts at .30, and the stock dropped to 790, you would buy the stock and then exercise your 800 puts. In practice, any purchase below 799.70 before 530pm would be a profit and you have the opportunity to make even more money if the stock rallies.